August 7, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week, lagging the tightening trend in the fixed-rate MBS sector. As a result, demand for ARM product was steady last week as investors took advantage of the spread pickup versus fixed-rate alternatives. Buying was focused primarily on new issue Agency 7/1s and 10/1s. These structures continue to compare favorably to 15-year MBS, particularly on an option-adjusted spread basis. Agency 7/1s and 10/1s offer a pickup of approximately 15 to 20 bps of OAS over 3.00% 15-year MBS.
We also saw investors adding GNMA 2.00% 3/1s at relatively low dollar prices (~$101). These structures have cheapened during 2017 and can offer relatively attractive yields compared to other variable-rate products.
Hybrid ARM issuance increased 19% from June to $3.4bn for July. This was the strongest month of issuance since October 2015 ($3.2bn). YTD issuance through July has totaled $17.1bn, which is nearly a 50% increase over the same period during 2016. GNMA led the improvement in monthly volume with an increase in issuance of $314mm, while FNMA and FHLMC experienced an increase of $236mm. 7/1s continue to make up most of the issuance at 42%. However, volumes for shorter-resets (3/1s and 5/1s) increased 47% during July to $1.4bn.
Prepayment speeds were released on Friday and contained no surprises. Overall, ARMs slowed approximately 11%, which was in line with the 9% reduction in the day count. July contained two less business days than June. In aggregate, Fannie ARM speeds decreased 3.0CPR (11.63%) to 22.8CPR. A similar decrease could be seen in the Freddie space, as speeds overall declined 3.1CPR (11.61%) to 23.6CPR. Prepayments on Ginnie ARMs decreased 1.4CPR to 24.0CPR.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG